From Briefing.com: 6:30PM Thursday After Hours : prices levels vs. 4 pm ET: A mixed tone in the after hours session following today's massive 1.0-1.6% pullback. News has come from a variety of companies, but none of it has been influential enough to definitively move the indices. Presently, the S&P futures, at 1126, are 1 point below fair value, and the Nasdaq 100 futures, at 1494, are 2 points above fair value.
The below table lists the evening's most notable developments:
Company Stock Move Reason for Move Guidant (GDT) 54.50 1.00
(-1.8%) During its conference call to discuss the Champion drug eluting stent program, medical device maker says it is delaying its plan to file for approval by 6-8 months, pushing off the date until 1Q05 (Mar); Company confirms that Champion has run into quality control problems, and the manufacturing process is being refined; Guidant first warned of such problems 5 weeks ago; Competitors in the drug eluting stent market (BSX and JNJ) have gotten a boost from the news
Netflix (00C0) 34.56 -1.39 (-3.9%) Online DVD rental service reports that it ended Q2 (June) with approximately 2.09 mln total subscribers - the high-end of management's guidance range of 1.94-2.14 mln; Total subscribers rose 82% despite Netflix raising its monthly subscription fee to $21.95 from $19.95 during the quarter; Traders have used the good news as a reason to take profits from the stock's 5-day, 22% move
Sybase (SY) 16.38 -1.29 (-7.3%) Database software maker warns for Q2 (June), saying that revenues should come in at $188-192 mln and EPS at $0.17-0.20 versus the Reuters Estimates consensus of $199 mln and $0.24, respectively; Company blamed softer than expected North American sales that were impacted by direct sales operations issues in the enterprise business; This is the second consecutive quarter Sybase has cut estimates; Stock is down 22% year-to-date
Verizon (VZ) 36.05 unch Biggest US regional telephone company agrees to buy Qwest Wireless' assets for $418 mln in cash in a deal expected to close in Q4 of this year or Q1 of next; The purchase will expand Verizon's network to a further 1.5 mln people by giving it licenses in several new markets; VZ is a holding in Briefing.com's portfolio for the conservative investor, and shares are up 13% since we added it on Nov 14
Tomorrow, the June employment report will be the main attraction. The consensus estimate for nonfarm payrolls is set at 250K, but Briefing.com believes anything significantly above that (coupled with a strong rise in average hourly earnings) is apt to raise inflation concerns (see yesterday's Looking Ahead column) and keep buying interest under wraps.
For more detail on these, and other developments, be sure to visit our Stock Market Update and Daily Sector Wrap. -- Heather Smith, Briefing.com
4:09PM Maxtor lowers Q2 guidance (MXO) 6.47 -0.16: Company issues downside guidance for Q2 (Jun), sees EPS of loss of $0.16-0.20vs. Reuters Estimates consensus of ($0.05) on revenues of $820-825 mln, consensus $956.5 mln. MXO says "result of a very aggressive pricing environment in both the OEM and distribution channels and lower than expected unit shipments, primarily to distributors".
4:08PM XM Satellite exceeds 2.1 mln subscribers at end of Q2 (XMSR) 27.27 -0.02: Co finished Q2 with more than 2.1 mln subscribers. XM added more than 418,000 net new subscribers in the quarter. XM's subscriber gain is more than double the number of subscribers added during Q2 03. Co saw significant growth at both retail and automotive dealerships, and it experienced very strong sales for Father's Day.
Close Dow -101.32 at 10334.16, S&P -11.86 at 1128.98, Nasdaq -32.24 at 2015.55: Today's has activity has been driven by a series of headline downgrades in healthcare, semiconductors, and brokerages while autos posted a dip in sales...Overall, sentiment was bearish from opening to closing bell...The market never really had any news to get excited about...We did see a late-day pop in the major averages heading into the close but a lot of that was short covering from today's move...This morning's economic data was largely unimpressive as a jump in initial unemployment claims set the tone for a day in the red...
Construction spending followed suit, coming in below expectations at 0.3%, and adding to the day's bearish tone...ISM manufacturing reported relatively in-line with expectations and did little to change market sentiment...Auto sales, released throughout the day, largely disappointed with Ford (F, -4.15%) announcing an 8% drop in U.S. sales while General Motors (GM, -2.47%) announced a drop of 15%...Two of today's most influential decliners were Cardinal Health (CAH, -24.83%) and Intel (INTC, -2.17%)...
Cardinal Health warned before the bell and that set off a wave of downgrades to the healthcare giant already under investigation for its accounting practices...Semiconductors under performed the broader market all session as one downgrade after another kept constant pressure on the Nasdaq...While today's downside was largely fundamental, a sizable portion can be attributed to weekend flattening in front of the 4th of July holiday and tomorrow's payroll number...NYSE Adv/Dec 1404/1905, Nasdaq Adv/Dec 947/2146
1:43PM Merix (MERX) 10.34 -1.00: Merix reported Q4 results after the close on Wednesday. Pro-forma EPS was ($0.05) on revenue of $44.520MM (+97.5% Y/Y) vs. Reuters Research consensus at ($0.02) on $44.58MM. Gross margin increased 1,562 bps Y/Y to 9.0%. Operating margin increased 2,146 bps Y/Y to (3.3%).
The communications sector contributed approximately 82% of sales. Top five customers were CSCO, ERICY, JNPR, MOT and NOK.
Lead times are currently at 5-6 weeks vs. 6-8 weeks at the end of Q4. The shortening lead times is negatively impacting pricing for premium services. Consistent with shortening lead-times, backlog declined from $21.9MM in Q3 to $19.8MM, and book-to-bill was 0.96. Capacity utilization averaged between 90-95% for the quarter. We commented in May that it would only be a matter of time before capacity utilization dropped from the upper 90% range given the company's high mix of turns business and substantially lower industry capacity utilization rates.
Management estimates turns revenue will decline from approximately 32% of sales in Q4 to 25% in Q1. Guided for Q1 pro-forma EPS of ($0.12-0.17) on $40.0-43.0MM (+30.3-40.1% Y/Y).
The following table shows price multiples and Y/Y growth rates for MERX compared against industry comps. Company *P/SG **P/OPG P/S Y/Y Rev Growth (%)
TTM 2004E 2005E TTM 2004E 2005E
Merix (MERX) 0.9 (43.8) 1.4 1.0 65.4 33.1
DDi Corp (DDIC) 0.8 0.5 0.9 0.7 0.6 2.3 31.4 19.0
Flextronics (FLEX) 0.5 (19.4) 0.6 0.5 0.4 8.6 17.7 14.9
Sanmina-SCI (SANM) 0.4 (133.3) 0.4 0.4 0.3 9.9 16.4 12.9
TTM Tech (TTMI) 1.0 10.5 2.5 2.0 1.6 89.0 40.1 22.0
Electronic Instruments & Controls 0.9 64.8 1.1 n/a 6.1 n/a
*P/SG Ratio: Normalized Trailing 12 month (Price / Sales) / Growth ratio as of June 25, 2004.
**P/OPG Ratio: Normalized Trailing 12 month (Price / Operating Income) / Growth ratio as of June 25, 2004.
MERX shares have declined almost 42% since the Q3 review, Story Stocks, March 25, 2004, when we suggested investors wait for a 20-30% pullback before revisiting name. Shares continue to trade at a premium to peer group despite the pullback and, based on our inverted EVA/DCF model, are priced for sustained lower 30% revenue growth from F06 assuming 10% operating margin.
We commented in May that the company's plan to double capacity will put tremendous pressure on margins unless management is able to capture significant new business. MERX will decelerate the production ramp of Wood Village and will not proceed with Phase II of the company's capacity expansion plan. The decision to slow production ramp and delay/cancel expansion is a necessary move given the negative order trends. But it also speaks volumes about management's lack of confidence in the business. We continue to think it is premature to buy into shares until there is clarity on the company's business trends and operating model, particularly with OEMs seeking to consolidate their supply chains (see Flextronics (FLEX 15.45 -0.50), Story Stocks, June 29, 2004).--Ping Yu, Briefing.com
12:39PM Cardinal Health (CAH) 52.85 -17.20: As the nation's largest drug wholesaler (at a market cap that is more than 3x the size of its main competitors), Cardinal Health's dire 'business update' last night has sent the group reeling 11%. The company effectively unloaded all of its bad news at once: warning for Q4 (June), FY04, and FY05, and then announcing an additional government inquiry into its accounting practices.
The net effect has left the market stunned as the severity of Cardinal Health's earnings troubles and problems with the government was not fully understood. The stock has been downgraded by 3 different brokerage firms this morning (see Briefing.com's Upgrades/Downgrades page - a Platinum product - for a full rundown), most of them expressing disbelief over management's conference call last night.
On the call, it came across as if management had not planned properly with its shift to a fee-for-service model from a buy-and-hold model. The company had cautioned earlier that the transition would cause a $0.01-0.02 reduction to Q3 (Mar) and Q4 (June) EPS, but never indicated it would carryover into FY05. Now Cardinal Health expects earnings growth of 'at least 10%' (versus it long-term goal of mid-teens or better), which brings the range to $3.88-3.91 as compared to the Reuters Estimates consensus of $4.20.
Basically, the new business plan for the pharmaceutical distribution and provider services segment (48% of operating earnings, 81% of revenues) puts pressure on margins as there is less forward buying opportunities. The benefit of a fee-for-service model is that it provides a more stable source of income; however, until Cardinal Health phases out the old system, inventory will continue to be depleted and hurt net income growth. Management admitted that its execution on this has been poor, saying it was 'disgusted with how we ended the year in the fourth quarter.' The company guided Q4 to $0.93-0.95 (consensus of $1.03) and FY04 to $3.53-3.55 (consensus of $3.63).
On top of the stalled earnings picture, management indicated that the SEC's formal investigation into its accounting practices remains active. The agency subpoenaed documents [on revenue classification and the methods used to determine that in Cardinal's distribution business] on June 21. Additionally, the US Attorney's Office for the Southern District of New York has opened up an inquiry related to the same subject.
CAH has been murdered today, plunging 25%. Still, even at these levels, the stock trades at a forward P/E multiple that is a premium (at 14.9x) to those of direct rivals AmerisourceBergen (ABC at 12.3x) and McKesson (MCK at 14.1x). We see little - if not, any - reason to invest in CAH at this time - the outcome of any of these investigations is unclear, earnings expectations are cloudy, and the stock's valuation is arguably rich. -- Heather Smith, Briefing.com
12:22PM Nasdaq Composite-- SOX drags index back to low (COMPX) 2014.43 -33.36: -- Update -- -- Technical -- Index is back probing support at 2013 after a minor bounce. Next short term support if follow through develops is in the 2006 to 2000 area (June 15 high, 20 day exp avg, psych). First step to improving today's pattern is a sustained push through 2019
9:07AM Ratings Briefing : Thomas Weisel downgrades FLSH to Peer Perform from Outperform, citing the following reasons: 1) expectations that ASP declines accelerate for the company in Q3 from Q2 (because FLSH made only modest price cuts in Q2), 2) concern that the company enters Q3 with high priced inventory that could cause near-term margin compression, and 3) its belief that orders slowed materially for USB drives in Q2 because of OEM inventory work-down, resulting in lower backlog entering Q3.
What It Means:
At Thomas Weisel, a Peer Perform rating means the stock is expected to perform in line with the median performance of the Analyst's coverage universe over the next 6-12 months
Why the Call Should Move the Stock
In light of the Emulex (ELX) warning, storage-related companies are expected to be on the defensive today… downgrade of FLSH by Thomas Weisel will increase FLSH's vulnerability to selling efforts
FLSH is up 11.0% since its low on June 17… downgrade at this point will create concern that stock has been overbought and due for profit taking
Reasons for downgrade center largely around concerns for Q3… with the market being a forward-looking entity, downgrade from Thomas Weisel will create concern about FLSH's earnings prospects in the September quarter
Sidenote:
On June 25 Smith Barney said US retail sell-through data of flash memory cards and USB drives for the month of May, as collected by NPD, showed USB drive revenues were weaker than expected, and while memory card revenues looked good on the surface, adjusted for manufacturer rebates, they too appear soft.
On June 15 FLSH reaffirmed Q2 guidance; said it was confident that revenues will exceed $68 mln, with earnings per share at or above $0.11 -- Reuters Research consensus is $0.12 and $69.53 mln (company will report results on July 19)
Bit of a contrarian call from Thomas Weisel as majority of analysts carry bullish opinion of FLSH at this juncture… ratings distribution is as follows: 3 Strong Buy; 4 Buy; 2 Hold; and 1 Strong Sell [source: Thomson/First Call]
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